How Much Money Do You Need to Retire?

by on July 28, 2011

Every person that is or has ever planned for retirement asks themselves the question: How much money do I need to retire?  Well, there’s no perfect answer for this question and everyone’s needs are different, so the best way to find the answer you’re looking for is to look at it from many different perspectives until you can feel comfortable with a range of retirement estimates.  In this article, we’ll study some charts that will get you some basic savings estimates to start your retirement plan goals.

We’ve created a table below that estimates how much money you need to save in order to retire with a given income level for the remainder of your life.  This is a very basic model and it has very basic assumptions.   It assumes that you withdraw the same amount of annual income each year during retirement.  It also assumes that all of your retirement money is invested at an average annual return of 5%.  Note that if you change the investment interest rate from 5% to 2%, you would need to save significantly more money (see additional table below).  To the contrary, if you were able to earn 10% on your investments (near historical averages for stock/bond mix portfolio) it would in many cases cut the amount you need to save in half or more (also illustrated in tables below).  When planning for how much money do you need to retire earlyretirement it is usually better to be conservative in your investments.  If you would like to earn 10% you should also plan for the possibility that you may earn less.

Another factor that you need to account for is inflation.  With the simple model below you can account for inflation by either assuming that the 5% return is a real rate of return, which means that you assume that you earn 5% more than inflation and that you withdrawals increase at the same rate of inflation.  Or, you can assume that there is no inflation in the model.  This would mean that you earn 5% which includes inflation and that your annual withdrawals do not increase at all over the years.  In many cases this is true in retirement, because as people age they tend to spend less (except on healthcare) and get more conservative (and thereby earn less on their investments).

And one last thing before you look at the table.  When calculating the amount of money you need to retire, make sure that you subtract your social security and pension payments from the total amount you’ll need.  For example, if you’ll need $150,000 per year, but are getting $50,000 in pension and social security (or other benefits), then you’d use $100,000 to make your estimates using the tables below.

Money needed to retire with 5% return

Now, for illustration purposes, let’s assume that you are conservative and keep your retirement assets in CDs or savings that only yield 2%.  The following chart shows the same information as above but with the new assumption of slower growth.  You can see that the differences in retirement savings needed to retire early are magnified as the years to live increase.  That is because the growth from annual returns is a huge factor in determining how long your retirement money will last.

Money needed to retire at 2% return

Now let’s look at how much money you need to save to retire if you earn 10% on your retirement savings.  And by the way, 10% isn’t an unreachable return.  Especially if you have a lot of years left to invest, as the longer you have to invest, the more stocks should be in your portfolio, and the higher the return you should recieve.  Here is the table.

Money needed to retire at 10% return

Now, you should be able to look at the three retirement charts above and make a pretty good guess at the years left to live and the amount of money you’ll need each year.  For example, if you want to retire at 50 and you are now 40, and you think you’ll live to 80, then you could choose 40 years to live.  Next, we suggest you compare the amount of money you need to retire using the three different rates of return (2%, 5% and 10%).   This will give you a large range of how much money you’ll need and hopefully encourage you not to get too conservative with your retirement investing.

For example, assume you will need $100,000 per year during retirement and that you have about 25 years.  At 2%, you’d need to save $1.9 million, at 5% you’d need $1.4 million and at 10% you’d need about $900,000.  In other words, your retirement savings would have to be in the $900,000 – $1.9 million range.  Depending on how conservative your investments are and how much safety cushion you want built in to your estimate, you’d probably want to target somewhere around $1.3 – $1.6 million as your retirement goal.

{ 3 comments… read them below or add one }

pocs September 2, 2012 at 9:14 am

These numbers are alittle scary. My employer offers no retirement plans and I don’t have the income to support investing. Many investing opportunities have risk involve which would greatly affect my yearly budget. From watching my parents I know that you can’t live on SSI benefits. They had a nice retirement account, but both were forced to retire at a early age due to medical problems. It didn’t take long for them to go through this. Might there be plans that although offer little pay offs, don’t involve too many risks?

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Nia April 26, 2013 at 1:49 am

Hi,
Sufficient financial resources are important in retirement.
we can not predict that how much money people need on their retirement it’s all depends on their
requirements or what they have planned after the retirement. I would like to say that if you have better planning, right budgeting, good expenses planning then you are on right track and it will make you sure that you will not loose your money unnecessary and you can do this by prioritizing the things it is most important.

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Adam Garcia July 9, 2013 at 6:28 pm

I have the unique perspective of a bankruptcy attorney whose parents own assisted living facilities in the wine country. From my experience almost no one saves enough for retirement. Those who can afford over $7,000 a month for quality elder care often have wealthy family members, while those who must pay these rates on their own often run out of money. (Even doctors). As for those who declare chapter 7 bankruptcy in their late 40’s or 50’s, government subsidized care in a nursing home is likely in their future, which is very unfortunate if you’ve had any experience in a nursing home.
Adam Garcia recently posted..Answers to some legal bankruptcy questions that might confuse youMy Profile

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